Rapid scaling slated for U.S. Healthcare business

DEERFIELD, Ill. _ Walgreens Boots Alliance topped analysts’ projections for fourth quarter revenue and earnings.

WBA posted adjusted earnings per share of 80 cents for the period ended Aug. 31, exceeding Wall Street’s expectation of 77 cents. Revenue of $32.45 billion surpassed the predicted $32.09 billion.

A fall off in COVID-19 vaccinations and a charge tied to UK stores led to a $415 million net loss in the quarter, as sales declined 5%. Sales growth at Walgreens and in the International segment, and revenue contributions from the U.S. Healthcare segment were more than offset by a 660 basis point impact from a sales decline at AllianceRx Walgreens.

Roz Brewer

“WBA has delivered ahead of expectations in the first year of our transformation to a consumer-centric healthcare company,” said chief executive officer Roz Brewer. “Our resilient business achieved growth while navigating macroeconomic headwinds. Fiscal 2023 will be a year of accelerating core growth and rapidly scaling our U.S. Healthcare business. Our execution to date provides us visibility and confidence to increase the long-term outlook for our next growth engine and reconfirm our path to low-teens adjusted EPS growth. Our strategic actions are unlocking sustainable shareholder value as we simplify the company and continue our journey to being a healthcare leader.”

For fiscal 2023, WBA projected adjusted EPS of $4.45 to $4.65. Healthy core business growth of 8 to 10 percent in constant currency is expected to be more than offset by adverse currency movements of approximately 2 percent and by a headwind of 15 to 17 percent from lower COVID-19 vaccination volumes.

Additionally, the company raised the U.S. Healthcare fiscal year 2025 sales target to $11 billion to $12 billion, from $9 billion to $10 billion previously. The segment is expected to achieve positive adjusted EBITDA by fiscal  2024. The company reconfirmed its expectation to achieve low-teens adjusted EPS growth in fiscal year 2025.

The company posted a fourth quarter  operating loss of $822 million, compared to operating income of $910 million in the year-ago quarter. The loss reflected a $783 million non-cash impairment charge related to intangible assets in Boots UK, and higher costs related to the Transformational Cost Management Program. Adjusted operating income was $744 million, a decrease of 38.2 percent, reflecting lower U.S. pharmacy operating results that lapped higher volumes of prior year COVID-19 vaccinations, and growth investments in U.S. Healthcare, partly offset by improved retail contributions in both the U.S. Retail Pharmacy and International segments.

The $415 million net loss compared to net income of $358 million in the year-ago quarter, reflecting the decline in operating income, which was partly offset by the favorable impact of a lower tax rate, and a gain on the sale of a portion of the company’s equity method investment in Option Care Health. Adjusted net earnings slid 31.9 percent to $694 million.

WBA had a loss per share of $0.48, compared to earnings per share of $0.41 in the year-ago quarter. The adjusted earnings per share of 80 cents were down  31.8 percent from last year.

Net cash was $85 million and free cash flow was $(407) million, a $1.3 billion decrease compared with the year-ago quarter driven primarily by lower operating income, pre-buy of seasonal inventory, U.S. legal settlements, and increased capital expenditures in growth initiatives, partly offset by working capital timing benefits.

The U.S. Retail Pharmacy segment had  sales of $26.7 billion, a decrease of 7.2 percent. Comparable sales increased 1.6 percent and lapped strong comparable sales of 8.1 percent in the year-ago quarter, which included a significant contribution from COVID-19 vaccinations.

Pharmacy sales decreased 8.8 percent, negatively impacted by a 10 percentage point headwind from AllianceRx Walgreens. Comparable pharmacy sales increased 3.0 percent. Comparable prescriptions filled decreased 3.5 percent while comparable prescriptions excluding immunizations decreased 0.1 percent. Total prescriptions filled in the quarter, including immunizations, adjusted to 30-day equivalents, decreased 4.4 percent to 298.7 million.

Front store sales decreased 2.4 percent and comparable front store sales decreased 1.9 percent compared with the year-ago quarter. Excluding tobacco, comparable retail sales decreased 1.1 percent. Comparable retail sales lapped strong results in the year ago quarter where comparable retail sales increased 6.2 percent, aided by broad based growth across all categories including strong sales of COVID-19 related items. Over a three-year period, comparable retail sales excluding tobacco increased 13.0 percent.

Gross profit decreased 15.3 percent to $5.3 billion compared to $6.3 billion in the year-ago quarter. Adjusted gross profit decreased 13.2 percent to $5.4 billion, reflecting a decline in pharmacy results from lower COVID-19 vaccinations and continued reimbursement pressure, partly offset by retail gross margin performance.

Selling, general and administrative expenses (SG&A) decreased 3.2 percent to $5.2 billion compared to $5.3 billion in the year-ago quarter. Adjusted SG&A decreased 6.8 percent to $4.8 billion, driven by lower volumes of COVID-19 vaccinations and cost discipline, partly offset by increased labor costs and the timing of marketing expenditures.

Operating income in the fourth quarter decreased 75.2 percent to $251 million compared to operating income of $1.0 billion in the year-ago quarter, reflecting higher costs related to the Transformational Cost Management Program. Adjusted operating income decreased 36.1 percent to $786 million compared to $1.2 billion in the year-ago quarter, reflecting lower COVID-19 vaccination volumes and continued reimbursement pressure, partly offset by improved retail gross margin and SG&A expense improvement.

The International segment had fourth quarter sales of $5.1 billion, a decrease of 6.6 percent, including an adverse currency impact of 13.3 percent. Sales increased 6.7 percent on a constant currency basis, with Boots UK sales growing 6.0 percent, and the Company’s German wholesale business growing 6.8 percent.

Boots UK comparable pharmacy sales decreased 6.9 percent, largely due to lower demand for COVID-19 services compared to the year-ago quarter. Boots UK comparable retail sales increased 15.2 percent, with notable market share gains in personal care and health and wellness. Footfall improved around 20 percent. Boots.com continued to perform well, accounting for 11 percent of retail sales in the quarter compared to 6 percent pre-pandemic.

Gross profit decreased 7.3 percent, including an adverse currency impact of 12.7 percent. Adjusted gross profit increased 5.4 percent on a constant currency basis, reflecting strong sales growth across all International markets, partially offset by lower demand for COVID-19 related services in the UK compared to the year-ago quarter and timing of National Health Service (NHS) reimbursement.

SG&A in the quarter increased 54.7 percent to $1.8 billion, due to impairment charges in Boots UK. Adjusted SG&A increased 1.9 percent on a constant currency basis reflecting increased in store activity and absence of COVID-19 related government support compared with the year-ago quarter.

Operating loss in the fourth quarter was $672 million compared to operating income of $46 million in the year-ago quarter, as a result of the $783 million impairment charges in Boots UK. Adjusted operating income grew to $163 million, an increase of 31.3 percent on a constant currency basis.

The U.S. Healthcare segment had fourth quarter sales of $622 million. On a pro forma basis, this segment’s businesses grew sales at a combined rate of 34 percent. Shields grew 48 percent, driven by key contract wins, further expansion of existing partnerships, and strong executional focus. VillageMD grew 31 percent, reflecting existing clinic growth and clinic footprint expansion.

Gross profit was a loss of $37 million and adjusted gross profit was a loss of $9 million. Shields gross profit, driven by further growth of existing partnerships and expanding margins, was more than offset by VillageMD expansion. As of the end of the fourth quarter, VillageMD had 334 total clinics open, an increase of 82 clinics compared to the year-ago quarter.

Fourth quarter SG&A was $301 million, and adjusted SG&A was $143 million, reflecting the two acquisitions, as well as continued investments in the Walgreens Health organic business.

Operating loss was $338 million. Adjusted operating loss was $151 million. Adjusted operating loss excludes certain costs related to stock compensation expense and amortization of acquired intangible assets.